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August 14, 2012

6 U.S. Cities on the Edge of a Fiscal Cliff

With recent warnings and downgrades from Moody’s, these municipalities may follow the likes of Stockton and Central Falls into bankruptcy

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Bankruptcy was once a last-ditch act reserved for companies and individuals. Declaring that creditors could not be paid carried a stigma that no one wanted to be associated with. And rarely would a municipality file for Chapter 9, the city version of Chapter 11. How times have changed.

Since 1981, 42 U.S. cities and towns have filed for bankruptcy. The pace has picked up with 10 in the last four years and many others teetering on the brink of insolvency. Recent cities taking the plunge include Mammoth Lakes and Stockton in California, and Central Falls, R.I.

The biggest issue is pension obligations to city workers coupled with a lack of revenue. The boom times of the 1980s and ’90s spurred the awarding of generous benefits to employees.

The Golden State has been hardest hit. The state’s budget woes have toppled governors and forced four cities since 2008 to declare bankruptcy, with more on the brink.

Maybe it didn’t help when Meredith Whitney famously declared on “60 Minutes” that there would be a wave of hundreds of billions of dollars in municipal defaults. Whitney may have been wrong about the scale of the problem, or maybe just the timing, but medium-size cities across the country are in serious financial difficulty.

So far, the muni bond market has weathered the storm, but as Ron DeLegge wrote on AdvisorOne, there is much danger for huge cities like Chicago and San Jose that just might be “too big to save.”

Adding to the worries, Moody’s issued a note of concern late last month about the seeming willingness of cities to declare bankruptcy rather than pay their debts. Some big cities are among the places in financial jeopardy.

Here is our look at 6 Cities on the Edge of a Fiscal Cliff.

1. Miami

It might be glamorous with its famous beaches, warm winters and reputation for late-night fun, but Miami is a city on the brink of a serious financial storm. Late last month, Moody’s considered downgrading the city’s credit rating amid an SEC investigation into allegations that the city had provided misleading budget figures to bond buyers. While Miami's bond ratings in the A range makes the city as an investment considered fairly safe, it is not top-notch, so any downgrade, the Miami Herald notes, could be disastrous amid budget concerns and falling revenue. Miami has the sole distinction of having faced SEC sanctions more than once. The first time was in 2001. A third investigation into bonds issued to build the Florida Marlins’ new stadium is under way.

2. Detroit

The Motor City might be seen as success story with the rebirth of its iconic carmakers, but its finances have failed to be dragged upward. Its fiscal problems have been written about and used as Hollywood fodder for years and Moody’s last month added another sad chapter when it reduced the city’s credit rating to junk status. The city, already with a budget deficit of $270 million, could end up paying more than $300 million over a seven-year period to retire $2.5 billion in debt. The state is considering appointing a monitor to try to save the city.

3. Fresno, Calif.

California appears to be ground zero for municipal bankruptcies and Fresno is clearly nearing the edge. In late July, Moody’s reduced Fresno’s credit ratings and added a negative outlook, meaning future downgrades are possible. The main problem is a mountain of pension obligations. The city of just over a half million faces debt of $462 million. With investors cautious in the wake of California’s bankruptcies, the prospects for Fresno seem shaky, at best.

4. Rockland County, N.Y.

With a credit rating hovering just above junk status and a negative outlook from Moody’s, this county in suburban New York has moved to rein in expenses by reaching a tentative deal with its unionized workers. With a budget deficit of nearly $100 million, action was needed. Closing a hospital is one of the measures the county is considering. Whether that and the givebacks from the union will stave off disaster is yet to be seen.

5. Compton, Calif.

We had no choice but to include another California city on the list. Unfortunately, there are several we could have chosen. But Compton, which is the birthplace of the rap impresario Dr. Dre, seems to be in the most imminent danger of declaring bankruptcy. In fact, city leaders warned that such a filing could happen in mid-September. On July 23, Moody's cut the rating on the city's sewer bonds to Ba1 from A2, which pushed its borrowing costs higher. The problem reportedly stems from years of balancing its general fund by improperly using money from water and sewer fees. Compton must pay the money back as it faces budget shortfalls.

6. Gary, Ind.

Once a vibrant city founded by U.S. Steel, Gary has long been in decline. With only about a fifth of the jobs it used to have, the city is facing a budget shortfall of $15 million on a budget of just $60 million. Layoffs and cuts in school programs in 2011 were followed by the library struggling to stay open this year. How the bleeding will end is unclear, but the city’s prospects don’t look promising.